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5:04 PM
Page 1033
Chapter 23
FINAL
1033
Performance Evaluation Using Variances from Standard Costs
At a Glance
1. Describe the types of standards and how they are established for businesses.
Key Points
Key Learning Outcomes
Standards represent performance benchmarks
that can be compared to actual results in
evaluating performance. Standards are established so that they are neither too high nor
too low, but are attainable.
• Define ideal and normal standards and explain how they
are used in setting standards.
• Describe some of the criticisms of the use of standards.
Example
Exercises
Practice
Exercises
Example
Exercises
Practice
Exercises
Example
Exercises
Practice
Exercises
23-1
23-1A, 23-1B
23-2
23-2A, 23-2B
Example
Exercises
Practice
Exercises
23-3
23-3A, 23-3B
23-4
23-4A, 23-4B
2. Explain and illustrate how standards are used in budgeting.
Key Points
Key Learning Outcomes
Budgets are prepared by multiplying the
standard cost per unit by the planned production. To measure performance, the standard cost per unit is multiplied by the actual
number of units produced, and the actual
results are compared with the standard cost
at actual volumes (cost variance).
• Compute the standard cost
per unit of production for
materials, labor, and factory
overhead.
• Compute the direct labor,
direct materials, and factory
overhead cost variances.
• Prepare a budget performance
report.
3. Compute and interpret direct materials and direct labor variances.
Key Points
Key Learning Outcomes
The direct materials cost variance can be
separated into direct materials price and
quantity variances.
The direct labor cost variance can be separated into direct labor rate and time variances.
• Compute and interpret direct
materials price and quantity
variances.
• Compute and interpret direct
labor rate and time variances.
• Describe and illustrate how
time standards are used in
nonmanufacturing settings.
4. Compute and interpret factory overhead controllable and volume variances.
Key Points
Key Learning Outcomes
The factory overhead cost variance can be
separated into a variable factory overhead
controllable variance and a fixed factory
overhead volume variance.
• Prepare a factory overhead
flexible budget.
• Compute and interpret the
variable factory overhead
controllable variance.
• Compute and interpret the
fixed factory overhead volume variance.
• Prepare a factory overhead
cost variance report.
• Evaluate factory overhead
variances using a T account.
(continued)
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Chapter 23
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FINAL
Performance Evaluation Using Variances from Standard Costs
5. Journalize the entries for recording standards in the accounts and prepare an income statement that
includes variances from standard.
Key Points
Key Learning Outcomes
Standard costs and variances can be recorded
in the accounts at the same time the manufacturing costs are recorded in the accounts.
Work in Process is debited at standard. Under
a standard cost system, the cost of goods
sold will be reported at standard cost.
Manufacturing variances can be disclosed on
the income statement to adjust the gross
profit at standard to the actual gross profit.
• Journalize the entries to
record the purchase and use
of direct materials at standard, recording favorable or
unfavorable variances.
• Prepare an income statement,
disclosing favorable and unfavorable direct materials,
direct labor, and factory overhead variances.
Example
Exercises
Practice
Exercises
23-5
23-5A, 23-5B
23-6
23-6A, 23-6B
Example
Exercises
Practice
Exercises
23-7
23-7A, 23-7B
6. Explain and provide examples of nonfinancial performance measures.
Key Points
Key Learning Outcomes
Many companies use a combination of financial and nonfinancial measures in order for
multiple perspectives to be incorporated in
evaluating performance. Nonfinancial measures are often used in conjunction with the
inputs or outputs of a process or an activity.
• Define, provide the rationale
for, and provide examples of
nonfinancial performance
measures.
• Identify nonfinancial inputs
and outputs to an activity.
Key Terms
budget performance report (1017)
controllable variance (1024)
cost variance (1014)
currently attainable standards
(1015)
direct labor rate variance (1021)
direct labor time variance (1021)
direct materials price variance
(1019)
direct materials quantity variance
(1020)
ideal standards (1015)
nonfinancial performance measure
(1031)
process (1031)
standard cost (1014)
standard cost systems (1014)
volume variance (1025)
Illustrative Problem
Hawley Inc. manufactures woven baskets for national distribution. The standard costs
for the manufacture of Folk Art style baskets were as follows:
Direct materials
Direct labor
Factory overhead
Standard Costs
Actual Costs
1,500 pounds at $35
4,800 hours at $11
Rates per labor hour,
based on 100% of
normal capacity of
5,500 labor hours:
Variable cost, $2.40
Fixed cost, $3.50
1,600 pounds at $32
4,500 hours at $11.80
$12,300 variable cost
$19,250 fixed cost